When Janel and I went to a restaurant where we regularly eat, we were informed that the buffet salad bar was no longer available, yet the prices were still the same. What was once a busy place located in a tourist district, now has only one worker in the front and very few customers when we’ve visited. It is just another example of how many businesses are dealing with shrinking sales by slashing their costs and at the same time reducing the value their customers receive.
It’s amazing how many organizations practice “business anorexia” as their primary strategy to deal with the downturn in the economy. This describes the extreme financial “starvation” that organizations put themselves through, and that weakens their ability to compete. If continued, it creates a downward spiral that causes a business to go through these steps: 1) Rising prices and a weakened economy prompts cost-cutting measures because it provides immediate relief on the bottom line; 2) lowering costs means stretching out the resources and cutting investment for long-term growth, and possibly laying off employees; 3) this leads to a demoralized workforce that spends more time worrying about their jobs rather than focusing on the customers; 4) the organization develops an internal focus and disconnection with the customer; 5) which impacts the customer’s experience negatively and causes them to shop around for other options; 6) which reduces sales, and 7) and causes the organization to operate on paper-thin margins or at a loss; 8) which leads to further cost cutting… and so the cycle continues until the business eventually collapses.
To avoid this sickly cycle, it’s best to interrupt the pattern by starting at the earliest point in the process, which is using knee-jerk, tactical cost-cutting measures. All costs can be divided into two major categories: tactical and strategic. Tactical costs are useful to operate a business, but they don’t clearly bring in more revenue. This would include all assets and activities that maintain the status quo, such as administrative costs of all types, and some costs associated with manufacturing or service operations. It also includes discretionary costs, which cannot be traced to a specific increase in profitability on the bottom line.
Strategic costs, on the other hand, are those assets and activities that grow the business and directly create greater value for the customer and business. Focusing on those costs will yield a greater return on costs over time with an ultimate outcome of profit improvement versus just cost cutting. The businesses that survive and prosper during tough economic times are those that actually outspend their competition on strategic costs, as a percentage of revenue; while reducing their tactical costs as much as possible.
For example, if you have a lead generation program that has proven to bring in $1,000 of profit for every $500 you spend; it would be ludicrous to cut your costs for this program because you’ll realize an equivalent reduction in profits. Instead, you should increase your spending for this cost if you continue to see the same percentage improvement in profits, even if it means you have to borrow the money.
Before cutting a single penny, your business should be able to answer these questions: What business are you in? What are your prioritized and agreed upon goals and objectives to maximize your purpose? What are the criteria that will be used to measure each asset and activity and guide you in your decisions to improve your profit?
Your company must analyze and justify all of your costs and develop an overall strategy that outlines your profit improvement philosophy and practices. You should understand these three best practices in order to reverse the downward spiral: First, you must know what you do best or better than any other business; second, your business must hire the best people who love doing what they do best; and third, you must thoroughly understand and deliver what your best customers value. The intersection of these three areas will create a significant differentiating factor for your business and cause it to become the obvious choice. Let’s look at these three dynamic aspects in more detail.
First, know what you do best – and become even better at doing it. Be creative and innovative so that you can continue to improve. Monitor your competition to know what they offer to their customers. Do some research or visit businesses similar to yours when you travel, and take notes from your visits. Sam Walton of Wal-Mart was constantly looking for better ways to do what Wal-Mart did best. He would visit his numerous stores and take notes; visit the competition and take notes, then implement the best ideas throughout the stores. It can sometimes be a mistake to expand your product or service offering too far, and thus dilute your core competencies.
When you fully understand what you do best, it’s important to find and hire people who love doing what you do best. The Container Store has been ranked the number one business to work for, and their philosophy is that one great employee is worth three good employees, three good employees are worth three average employees, and one average employee is worth three lousy employees. Therefore one great employee is worth 27 lousy employees – and they’ll be a profit center for your business.
Nordstrom’s number one customer service strategy was to be meticulous about hiring the right people and then training them to sell – not hiring good salespeople and training them to be nice. You need to find people who genuinely like working and serving your customers, and who make customers feel important and valued. Nordstrom’s philosophy is to “hire the smile, train the skill.”
I’ve worked with several organizations that are very careful about who they hire. Whenever they meet someone working at another business who has great customer service skills, they will make a note about that person and if a position opens up, they will invite him or her to apply. What do you do if you have people who don’t appear to love doing what you do best and are not good working with your customers? If you’ve tried to coach and train them to become better customer service reps, then you might need to find other work for them, possibly in a support role.
The third factor is to perhaps the most important. You have to identify your best customers and deliver what they truly value. This process requires a mental shift from being transaction-oriented to becoming more customer outcome focused. Customers don’t just buy goods and services; they buy what those products do for them, or the outcome they expect. If you can understand that outcome and exceed their expectations, then you will be able to deliver greater value to them, which will develop greater customer loyalty.
Once these three factors are operating within your business, you will be able to reverse the downward spiral and instead of cutting costs, you’ll have the additional revenue to train your staff, create greater job security and allow them to focus on your customers by providing the resources they need to fully serve them. When your customers feel like they are getting greater value from your business, it will differentiate your business from the numerous competitors who sell similar goods or services, and it will cure business anorexia by allowing you to have an organization that is well-fed from the growing sales of customers.
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